Copyright 2018 Mitul Kotecha

This week there a number of key events to focus attention on including European Central Bank (ECB) policy meeting, Federal Reserve FOMC March minutes, the commencement of India’s general elections, China data, and further Brexit developments as UK Prime Minister May tries to gain a further short extension to the Brexit deadline, until June 30.

The better than expected US March jobs report, revealing a bigger than expected 196k increase in jobs, with a softer than expected 0.1% monthly increase in hourly earnings, which effectively revealed a firm jobs market, without major wage pressures, helped US markets close off the week on a positive note. The data adds to further evidence that the Fed may not need to hike policy rates further.

The European Central Bank decision is likely to prove uneventful though recent comments by ECB President Draghi have fuelled speculation that the central bank will introduce a tiered deposit system to alleviate the impact of negative rates on banks. EUR is unlikely to benefit from this. Separately Fed FOMC minutes will be scrutinised to ascertain how dovish the Fed has become as the markets shift towards pricing in rate cuts, but it is unlikely that the minutes provide further fuel to interest rate doves.

Friday is the deadline to agree on an extension with the EU to prevent a hard Brexit. Meanwhile PM May is set to restart talks with opposition Labour Party leader Corbyn to thrash out a cross party agreement on Brexit terms ahead of an EU summit on Wednesday that will look at her request for a Brexit extension until June 30. GBP has lost momentum lately and investors appear to be fatigued with the daily Brexit news gyrations.

Meanwhile, US-China trade talks appear to be edging towards some sort of a deal while Chinese data this week is also likely to be supportive for risk assets. As China eases financing conditions, evidence of a pick up in the credit impulse will be evident in March aggregate financing, new loans and money supply data this week. Meanwhile China’s March trade data is likely to look better or at least less negative than over recent months. This suggests that risk assets will likely fare well this week.

India will be in the spotlight as India’s multi stage elections kick off on Thursday. Prime Minister Modi is in good stead to ahead of elections, boosted by his government’s reaction to recent terrorist attacks on Indian paramilitary in Kashmir. Concerns that Modi’s ruling BJP would lose a significant amount of seats in the wake of state election losses towards the end of last year have receded. Nonetheless, election uncertainties may keep the INR on the backfoot this week.

Reserve Bank of India (RBI) governor Patel resigned yesterday in a surprise move. Patel cited “personal reasons” but it is likely to have much to do with tensions between the government and RBI. Although it had appeared they had reached a compromise, it appears that Patel didn’t feel that the RBI came out of it well. Patel’s resignation came just ahead of a RBI board meeting on Friday, and has hit India’s markets.

The timing is not good. Patel’s resignation comes just ahead of the release of five state election results today, with Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana and Mizoram, all having gone to the polls. Exit polls have suggested a weaker showing for PM Modi’s BJP, with Madhya Pradesh and Rajasthan likely to deliver blows to the BJP. The outcome of the elections will be scrutinised for clued ahead of next year’s general elections.

Issues such as dealing with non-bank financial companies (NBFCs), implementation of the Insolvency and Bankruptcy code and even interest rate setting, have all been under scrutiny over recent months. How to deal with tightening liquidity has been a source of contention, with the government wanting the RBI to do more to ease liquidity and lending conditions. The RBI pushed back against the government’s request for a
higher payout from central bank reserves.

Although the government has not yet announced a replacement to Patel it will clearly be important that whoever it is, will be seen as independent of the government. The RBI under Patel has been seen to be overly hawkish by some and in this respect the government may be able to install someone who is more open to easing both monetary policy and lending constraints.The next steps will be important.

If the government nominates someone to replace Patel who is seen as more susceptible to political influence it could have much further and deeper negative consequences for India’s markets. If however, the government is seen to nominate someone who can maintain the independence of the RBI it will bode well for confidence in Indian assets.

Dear readers, it’s been a long while since I wrote a blog post and I must apologize for their absence. I have left my job at Credit Agricole CIB and will be moving from Hong Kong to Singapore to work for another bank. I am currently on gardening leave and am therefore not following market developments anywhere near as closely as I was until I start my new job at the end of June. Nonetheless, given the major events in India over recent days, with the victory of Narendra Modi and his Bharatiya Janata Party (BJP) in general elections, I felt compelled to write something.

Firstly the fact that the BJP won a landslide victory with 282 seats out of a total of 543 ensures that for the first time in decades the government in India does not have to be encumbered by a wide range of political beliefs and views. The consequent inaction a wide ranging coalition would have entailed would lead to renewed policy paralysis. As it is the BJP can form a majority government, with Modi able to emulate the successful reform policies he implemented in his home state of Gujarat while he was Chief Minister there. Being a Gujarati I can’t help but be caught up in the euphoria of what this could mean for India.

In contrast the Congress party and its leaders from the Nehru/Ghandi dynasty suffered a massive defeat, not only throwing them into opposition but shoving them to the margins in terms of political strength. Admittedly there has been a lot of money that has poured into Indian stocks and bonds over recent months but this does not necessarily mean that a BJP majority was priced in. On my last visit to India many of the clients I met actually thought that Modi may have been ousted while it was not felt that he and the BJP would be able to gain an outright majority. In the event he proved doubters wrong. In other words there is still plenty of scope for upside for the rupee and Indian stocks and bonds.

Now before we all get too excited a dose of reality needs to be brought into the mix. The “Gujarat model” was one of rapid improvements in infrastructure, reduction in bureaucracy and red tape and an encouragement of foreign investment. Clearly nothing in India is going to change overnight and adapting the model implemented in Gujarat, a state of 60 million people, to a country of over 1 billion people will not be easy. There will also be risks in terms of social tensions given the more right wing views of Modi and his party. Nonetheless, the strong mandate given to Modi by the electorate was for tough reform and this is what Modi and his style of government is best at.

There is little to time for a Modi honeymoon. The country’s bloated fiscal deficit, persistent current account deficits, elevated inflation, high indebtedness in some sectors, job market rigidities, inconsistent tax policy and masses of red tape and corruption, are only a few of the issues to contend with in a country with a wide spectrum of socio economic standing and religious views. Modi may also have to show some new secular credentials to ensure that his policies do not fuel sectarian tensions, something that may not come easy.

The hope among Indians and foreign investors is that Modi can once again push the economy back onto its fight and move to growth rates closer to 8-9% rather than 4-5% that the country under Congress rule has settled into. The selection of officials especially the Finance Minister will give important policy clues while ensuring that the well regarded central bank governor Rajan retains his post will help solidify confidence. Having been disappointed so many times in the past it is tough not to be skeptical but it may finally be time to throw caution to the wind and give Modi the benefit of the doubt. If anyone is up to the job it appears that Modi has the right credentials for it.

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The information published within this blog has been prepared on the basis of publicly available information and other sources believed to be reliable. Whilst all reasonable care is taken to ensure that the facts stated are accurate, the author is not in any way responsible for the accuracy of its contents. The comments are intended to provide clients with information and should not be construed as an offer or solicitation to buy or sell securities, currencies or any other financial product. The author makes no recommendations as to the merits of any financial product referred to in this blog and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products. The views expressed here are purely personal and do not represent the views or opinions of TD Securities